For the small business owner, tax season can be stressful, and the prospect of shelling out a load of money to the government is not a pleasant one. That's why making sure you take every tax deduction you're entitled to is crucial. Here are five often-overlooked tax deductions that could save you and your business some money.
Key Takeaways
- If you have business meetings over lunch, you may be able to deduct part of the cost of your meals.
- If you use your phone or internet services for work, you can deduct the portion of your costs that are business-related.
- If you pay for your health insurance, you may be able to deduct the cost of the premiums.
- You can deduct many car and travel expenses, too.
Business Tax Deductions: An Overview
The Internal Revenue Service (IRS) defines deductible business expenses as those that are "ordinary and necessary" to the business. Of course, the agency backs up that ambiguous phrase with a mountain of rules about deductible expenses.
While many of the most common tax deductions available to individuals were eliminated or capped with the passage of the Tax Cuts and Jobs Act of 2017, business deductions remained largely intact.
Some of those deductible costs are obvious, such as office rent, equipment and supplies, staff salaries, and business insurance, while others might not occur to you at first.
Important
The 2017 tax reforms added a new and valuable tax deduction for many small businesses: the qualified small business deduction. It allows eligible businesses to take a deduction equal to 20% of their qualified business income (QBI).
5 Often-Overlooked Deductions
Some of your everyday spending may be deductible if it has an associated business purpose.
1. Eligible Meal Expenses
If you often have working lunches, you might be able to deduct 50% of those meal expenses. When you meet with partners, employees, or business contacts, consider doing so over lunch. As long as the expenses are reasonable, you are allowed to deduct 50% of meal costs incurred while conducting business.
To maximize this deduction, it is important to maintain detailed records, including the date, location, attendees, and business purpose of the meal. Utilizing accounting software can simplify tracking these expenses and ensure that you capture all deductible meal costs. Hang onto your receipts in case any of your meal expense deductions are inquired of by the IRS.
Tip
Struggling to keep track of your business expenses? Accounting software is deductible, too, if it is used for your business.
2. Cellphone and Internet
Many small business owners use their personal cellphone and internet services for both business and personal purposes. The portion of these costs that are business-related is deductible.
To claim this deduction, you need to determine the percentage of use that is for business and apply that percentage to your total bill. For instance, if 60% of your cellphone usage is for business purposes, you can deduct 60% of your cellphone bill as a business expense. Similarly, for internet usage, calculate the business-related percentage and deduct that portion.
Keeping logs of business-related calls and internet usage can help support this deduction. Additionally, using separate devices or services for business and personal use can provide clearer documentation and maximize the deduction.
3. Healthcare Premiums
If you have an individual health plan (not a group plan) and pay your healthcare premiums out-of-pocket without tax breaks or subsidies, you may be able to claim those premiums as a deduction. To be eligible, you'll need to be a sole proprietor, a partner in a partnership or a limited liability company (LLC), or a shareholder in an S corporation who owns more than 2% of its stock.
Let's say you are a sole proprietor and your business and personal income totaled $60,000 for the year. Your combined state and federal income tax obligations are likely to be around 30%. If you spend $10,000 a year on health insurance premiums for yourself and your family, you can deduct that cost. Your taxable income will be $50,000 instead of $60,000, saving you about $3,000 in total tax payments.
The self-employed health insurance deduction is considered an adjustment to income and reported on IRS Form 1040 Schedule 1: Additional Income and Adjustments to Income (line 17).
Business owners with employees for whom they provide health insurance coverage through a group plan can also deduct any portion of the premiums that they pay as a business expense.
In addition, small businesses that are enrolled in the federal government's Small Business Health Options Program (SHOP) may be eligible for the Small Business Health Care Tax Credit, which can cover up to 50% of their costs. (Tax credits are even better than deductions because they reduce the tax you owe on a dollar-for-dollar basis rather than simply reducing the amount of income that you are taxed on.)
4. Car Mileage
Even if you don't use a car or other vehicle strictly for business, the costs you incur for using your personal car for business-related purposes can be deductible.
There are two different ways you can calculate the deduction, the first of which is simpler:
- You can take the standard deduction, which was 65.5 cents per mile for the 2023 tax year. Just multiply that by the number of miles you drove for business. This number has increased to 67 cents per mile for the 2024 tax year.
- Alternatively, you can use the actual expenses method, which requires you to track all of your car-related costs, including loan or lease payments, gas, oil, repairs, insurance, registration fees, and depreciation. Add up the costs, then multiply the total by the percentage of your mileage for the year that was devoted to business.
On top of either deduction you can deduct business-related tolls and parking fees, which are reported separately.
5. Other Travel Costs
When you travel entirely for business, those costs are totally deductible. Similarly, when you travel entirely for pleasure, those costs are not. However, if your trip combines business and pleasure you may be eligible to deduct the portion of your travel costs that are business-related. The rules differ for domestic and international travel, and conventions and "luxury water travel" have their own sets of rules. The IRS spells them out in Publication 463: Travel, Gift, and Car Expenses.
On the subject of travel, if you rack up points or miles on a credit card, it's best to save them for non-deductible vacation travel and take the full deduction for the cost of your business trips.
What Can You Write Off on Taxes With a Limited Liability Company (LLC)?
If you have income from a limited liability company, you are entitled to deduct your expenses like any other business. A LLC can pass all of its profits on to its partners so that the partners, not the LLC, owe all taxes. It's not required to be set up that way but most are, in order to avoid the dreaded "double taxation" of both the company and its partners.
What Can You Write Off as a Business Expense?
As you can imagine, the answer could fill a shelf of books. In short, the IRS defines deductible business expenses as "ordinary and necessary" costs of doing business.
It splits these into a couple of broad categories, including the cost of goods sold (raw materials, freight, storage, labor, and factory overhead), and capital expenses, including startup costs, business assets, and improvements.
Breaking it down a bit further, some deductible expenses include your business rent, salaries, costs of travel, telephone and internet costs, legal fees, advertising and marketing costs, and interest and fees on loans.
How Much Can a Self-Employed Business Owner Make Before Paying Taxes?
You don't have to file an income tax return if your net earnings from self-employment for the year were under $400—unless you're required to file for other reasons, such as income from other sources.
Can I Deduct Home Office Expenses?
Yes, you can deduct home office expenses if you use part of your home exclusively and regularly for business. The deduction can include mortgage interest, insurance, utilities, repairs, and depreciation, calculated based on the percentage of your home devoted to business use.
What Depreciation Deductions Can I Claim for Business Assets?
Business assets with a useful life of more than one year can be depreciated over time. The IRS allows different methods for depreciation, such as the Modified Accelerated Cost Recovery System (MACRS). Certain assets may also qualify for bonus depreciation or Section 179 expensing, allowing for immediate full or partial write-offs.
The Bottom Line
Business owners are eligible for a variety of tax deductions that individuals who don't own a business are not. These may include costs related to vehicles, home offices, travel costs, healthcare, and technology.
